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Balanced View on Korea Electric Power Corp.

We issued an updated research report on Korea Electric Power Corp. (KEP) on Mar 27. The company recently reported relatively strong earnings growth in the fourth quarter of 2013 on higher revenues from increased power sales and overseas business.

This Zacks Rank #3 (Hold) stock turned to profit in the fourth quarter of 2013 as well as full-year 2013. Gain from foreign exchange translation helped the company to make a turnaround for the first time since 2007.

Korea Electric continues to make efforts towards the expansion of its power generation assets. The company plans to invest around KRW 20.4 trillion, KRW 18.7 trillion and KRW 17.1 trillion in 2014, 2015 and 2016, respectively, under its capital expenditure program. Currently, the company is involved in several important projects, including Shin-Wolsong Unit 2, Shin-Kori Units 3 & 4 and Shin-Ulchin Units 1 & 2, Yeongheung Thermal Power Plant Units 5 & 6, and Seoul Combined Cycle Power Plant Units 1 & 2. The company is expected to meet higher projected power demand following the completion of these projects.

Korea Electric is now focused on overseas operations in China, Saudi Arabia, Philippines and the United Arab Emirates It currently operates 42 projects in 21 countries. The company expects to increase its revenue from overseas projects to KRW 29.4 trillion by 2020. Currently, it has the construction of 2 generation projects underway in China.

Being a South Korea based company, most of Korea Electric Power’s costs and expenses are denominated in Korean won. Thus, any change in the Korean won could affect its profitability in U.S. dollar terms. The company imports all its uranium ore concentrates from outside South Korea (including the United States, the United Kingdom, Kazakhstan, France, Russia, Canada and Australia), which are paid primarily in U.S. dollars.

In addition, it is apprehended that unfavorable judgment in pending regulatory cases, such as that involving the automatic fuel cost pass-through mechanism, may negatively impact the company’s earnings. Also, the profitability of the company is dependent upon rate relief at regular intervals from the Ministry of Knowledge Economy of South Korea.

Others Stock to Consider

Some better-ranked stocks worth considering in the sector include Otter Tail Corporation (OTTR), Public Service Enterprise Group Inc. (PEG) and American Electric Power Co., Inc. (AEP). While Otter Tail and Public Service Enterprise carry a Zacks Rank#1 (Strong Buy), American Electric holds a Zacks Rank#2 (Buy).